Qualcomm Follow up Point, Epic/Fortnite and the App Store

Qualcomm Follow up Point
I appreciated all the email discussion yesterday on my article. I had hoped a point I made at the end was more precise, but just in case it wasn’t, I want to add a more specific clarification.

As I concluded the article, I made the point that the superior technology, and IP, as well as the massive amount of RND Qualcomm spends in order to make it easier for customers to make wireless products and compete is why you can argue some of the higher fees associated are reasonable. I was trying to elegantly challenge the assertion the FTC put forward that Qualcomm’s royalty rates are “unreasonably high” and that the FTC argued those rates are reasonably high because of their dominant market position. To make it clear, what I was trying to put forth was that competitors failure to create competitive products–and their failure to engage in the wireless ecosystem meaningfully–without Qualcomm’s IP then suggests their rates are not unreasonable but also that they are worth it based on superior technology not dominant market position.

The court went on to say the FTC’s argument fell short here and specifically called out this argument as something better suited for IP law than antitrust law. Which I think is spot on.

Lastly, and somewhat of an aside, I remarked in my summary of the congressional antitrust hearing that I was concerned at the suggestion from certain folks in congress that basic business competition tactics are wrong or frowned upon. To that end, I found this statement to be poignant from the 9th circuit judges opinion:

“Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not……The company (Qualcomm) has asserted its economic
muscle “with vigor, imagination, devotion, and ingenuity……It has also “acted with sharp elbows—as businesses often do.”

May businesses continue to act with sharp elbows!

Epic/Fortnite and the App Store
Epic today announced the MEGA Drop. A new way to pay for virtual goods within Fornite. If you look over the blog post released this morning, it is quite clear they have done this to directly address the app store commission and underlying debate within iOS. When this first hit this morning, there was some question as to if this was done with Apple’s blessing. However, reading through the blog post I do not think this was negotiated with Apple and Epic is indeed daring Apple to do something.

Pundits on Twitter are adding the “grab the popcorn” emoji’s to their tweets on this knowing how Apple responds will be crucial when it comes to this debate about App store fees, payment choices, and developer revenue. As we all know, Fornite is a massive global ecosystem and I honestly see no way Apple pulls the app. This means this may be the last shoe to drop which will force a change by Apple.

What is interesting in the press announcement from Epic is how they framed the two top of mind questions/issues surrounding the app store. Safety, and choice. Here is the excerpt:

Why has Epic decided to implement its payment system for purchases inside Fortnite on iOS and Android?

By offering an alternative payment system, we’re not only offering players more choice, but we’re able to pass along the savings to players.

Does a new payment method on mobile mean purchases there are less safe?

No. Thousands of apps on the App Store approved by Apple accept direct payments, including commonly used apps like Amazon, Grubhub, Nike SNKRS, Best Buy, DoorDash, Fandango, McDonalds, Uber, Lyft, and StubHub. We think all developers should be free to support direct payments in all apps. In operating Fortnite on open platforms and operating the Epic Games Store, Epic has processed over $1,600,000,000 of direct payments successfully, and uses industry-trusted encryption and security measures to protect customer transactions.

Clearly Apple and Google acknowledge that third-party payment services are safe and acceptable for goods and services. Epic direct payment simply offers players the same kinds of payment options as these other apps.

Quite tactfully, Epic has structured the above clarifications. The first about why brings into the spotlight something most consumers do not really think about. Which is the 30% fee given to Apple and Google, which is usually passed on to the consumers in cost. They are basically saying we are doing this to save you money should you prefer it, and spoiler most will prefer it.

Second, they address the matter of safety. This is truly one of the core arguments by Apple and Google (but more so Apple) to use Apple payments and not offer other choices which is safety. Safety is a legitimate concern since no consumer wants to buy a random app and then realize their identity has been stolen by a hacker or data sold by the company they purchased the app from. I affirm this concern, however, I have always maintained it does not apply every company distributing apps in the app store.

Epic is essentially hitting the nail on the head here saying they have already processed over $1.6 billion in payments, making it clear they know what they are doing here, and that they use industry-standard encryption.

The user-interface for this move is also quite interesting, and should this adaptation be granted by Apple, I think this is the way to do it.

If you do not already have an account with Epic and choose to use Epic direct payment, you are then taken to a screen where you enter your name and credit card details. Should consumers get to that screen and decide they don’t trust Epic or don’t want to take the time to put in your payment information, they can go back and use Apple’s payment or Google’s. Epic is essentially saying if it’s more convenient or you get more peace of mind using Apple’s or Google’s payment process then feel free it just costs a little more.

It will be interesting to see Apple’s response. But I do believe evolution in their policy is necessary.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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